Chemicals & The Economy

2010 was a remarkable year for chemical company profitability. Back in Q1, BASF's Jürgen Hambrecht suggested that "the worst is behind us, even though dark clouds remain". Results continued to improve in Q2, with Sinopec highlighting the importance of "state stimulus measures" in China. And by Q3, Dow were seeing "a sustained global recovery led by Asia".

Now, the blog's regular look at quarterly company results shows that confidence continued to rise in Q4, with SABIC reporting a "strong operating performance". As in 2007/H1 2008, higher raw material prices seem to have been passed through with few problems, with only downstream consumers, such as AkzoNobel, feeling any pain from this exercise.

Hopefully, today's confidence will continue through 2011. But if crude prices remain at current levels, the blog would be astonished if "the dark clouds" do not return before too long.

AkzoNobel. "Western and northern Europe experienced challenging market conditions due to low consumer confidence, a weak construction and renovation industry and lower trade demand."
Arkema. ""Significant price increases passed-on higher raw material costs".
Asahi Kasei. "Market prices of acrylonitrile and adipic acid remained high on strong Asian demand".
BASF. "Strong improvement in income from operations in the segment thanks to increased margins, especially for basic products, and higher volumes."
Bayer. "MaterialScience returned nearly to pre-crisis levels more quickly than expected, but CropScience and HealthCare were below expectations".
BP. "Expect the petrochemicals environment to remain robust".
Brenntag. "Continuation of the positive trends in the chemical distribution industry".
Celanese. "Record full-year earnings in consumer specialties, advanced engineered materials and industrial specialties".
Clariant. "Solid underlying demand for their products and services."
ConocoPhillips. "Benefited from significantly improved ethylene margins".
Croda. "Demand was strong in all business areas and across all major geographies."
Cytec. "Segment results were varied. Raw material volatility remains a concern."
Dow. "With inflation concerns in emerging geographies, lingering unemployment issues in the US and sovereign debt issues in Europe, we remain prepared for a reversal in momentum".
Dow Corning. "Rising raw material and energy prices will present us with some additional challenges in 2011".
DSM. "Expects end-markets to show continued growth this year, driven by the recovery in global economies."
DuPont. "Q4 was a strong finish to an outstanding year".
Eastman. "Strengthened end-use demand in packaging and durable goods".
ExxonMobil. "The biggest impact was the rapid rise in feedstock costs that really outpaced price increases."

Revolution and unrest have many causes. Very often, as now in the Middle East and N Africa (MENA), their strength is due to a wide range of economic, social and political factors combining to create a coalition of angry people.

Age profile is also a key factor. As shown in the above chart, based on CIA World Factbook data, they all have young populations. And as the CIA note:

"Age structure can be used to help predict potential political issues. For example, the rapid growth of a young adult population unable to find employment can lead to unrest".

Those countries currently in the frontline of unrest have some of the youngest median population ages in the world. Whilst the USA (green column) is at 37 years, and Japan (red)/Germany (purple) at 45 years:

• Yemen's median age is just 19 years
• Iraq, Egypt, Libya and Oman are all in the 20 - 25 year range
• Iran is at 27 years; Tunisia and Bahrain are at 30 years

This is perhaps another indication that current problems may not end quickly.

Note: Median age is the age which divides the population of a country into 2 equal groups

Uncertainty over the Libyan situation is raising questions over the potential impact to its exports. The blog's IeC colleague, Bob Townsend, has therefore done a quick analysis of the 3 main products that might be impacted - ethylene and propylene (blue columns), and methanol (green, right hand scale).

As the chart shows, using data from Global Trade information Services, the EU is the largest buyer for all 3 products. Taking average 2008-10 volumes:

• Ethylene. EU bought 64KT (55KT to Romania). Morocco bought 23KT.
• Propylene. EU bought 73KT (Greece 43KT, Germany/Belgium 10KT). Egypt took 12KT, Indonesia 10KT.
• Methanol. EU bought 418KT, with Italy 161KT, Spain 79KT, France 77KT, Greece 59KT the main consumers. Turkey bought 143KT.

These volumes can clearly be sourced elsewhere, although Mediterranean consumers will no doubt face increased voyage times. Hopefully this data will help those undertaking Scenario planning to determine how to minimise any disruption to their own positions.

The IEA (International Energy Agency) is now very worried about the impact of today's high oil prices on the global economy.

Their chart above highlights the problem for the USA and EU. If oil prices average $100/bbl in 2011, then the EU (green column) will be paying more for its oil imports than in 2008, and the USA (yellow) nearly as much:

• The cost to the USA will be $385bn, 2.6% of GDP
• The EU will pay $375bn, 2.2% of GDP

As the IEA chief economist, Fatih Birol notes, this will cause a "serious problem for business and consumer confidence, which the U.S. economy desperately needs for sentiment to improve." Whilst the EU is also at risk, because "Europe is the weakest link in the chain of the global economic recovery."

Similarly, the Financial Times notes that "in the past - in 1974, 1979 and 2008 - sharp oil price rises have come shortly before recessions in leading advanced economies."

Update: The head of the IEA, Nobuo Tanaka, has told the Wall Street Journal that "financial speculation was partly to blame for sharp oil-price movements". And he went on to add that "the market is tightening because of economic recovery, but certainly speculation has a role and amplifies volatility."

Tanaka's comments support the blog's own view. Increased Chinese and Western demand are not the only reason why prices are at $100/bbl. There are still near-record levels of inventory around the world. And, as Tanaka also noted, "OPEC and Saudi Arabia have enough spare capacity and are ready to produce more".

February's data on US auto sales contained good news, and not such good news, for the chemical industry.

• The good news was that sales were relatively strong, as the chart shows (red line), although still below levels seen in the 2005-8 period (black line).
• And higher oil prices are supporting sales of more efficient autos. This should increase polymer sales, as steel and glass is replaced.

• The not such good news was that companies are still using heavy discounts to boost sales:
o GM continued to offer major incentives, plus cheap financing.
o Toyota was also offering large incentives, which will no doubt continue into March, as it seeks to counter news of a further 2.2 million vehicle recall.

This suggests the US auto industry is still suffering from a lack of pricing power, in spite of all the $bns spent in restructuring. This will not make it easy for chemical companies to push through further feedstock-related increases for its raw materials.

The blog's recent visit to Singapore included several discussions about the slow start to the New Year in China. And these concerns were confirmed last week in the downturn reported by the OECD's leading indicators for China (Organisation for Economic Co-Operation and Development).

Separately, as the chart shows, the Baltic Dry Index of ocean freight costs is signalling a similar trend. It is an excellent proxy for world trade and activity in China, as it covers the heavy bulk products (iron ore, grains, coal).

It was strong through 2007/8, before collapsing. And it then rallied again until last June. But since then it has fallen quite sharply, and is now very close to its earlier lows in Q4 2009.

Of course, part of its weakness relates to the terrible floods in Australia earlier this year. These clearly reduced coal and other volumes. But it has since shown little evidence of recovering, which is not a good sign. The blog will continue to monitor developments closely.

The blog has been following the development of General Motors' electric auto, the Volt, since October 2008.

Its old friend, Pedro Spohr of Galp in Portugal, had highlighted how a move to electric autos had the potential to change naphtha balances for the chemical industry.

So it is delighted to see that the Volt has achieved good reviews on its debut in the USA. Its $36k price tag means its not going to change the balances on its own. But hopefully its success will inspire cheaper models to be developed in the USA and around the world.

After all, cynical financial magazines like Barrons don't usually conclude reviews as follows:

"All in all, the most remarkable thing about this General Motors car is how unremarkable life with it is. Yes, dear reader, America can still build something innovative, clever and first-rate."

Procter & Gamble (P&G) is the world's largest consumer products company, with sales of $80bn.

Its Pur water purification product highlights how Prof Michael Porter's 'Shared Value' concept, highlighted in the blog in January, has the potential to unleash the next wave of global growth.

Pur helps to reduce deaths from diarrhoea in developing countries. And P&G have discovered that giving it away, or supplying it at cost to aid agencies, makes excellent commercial sense.

This ties in with the New Normal mood amongst Western consumers.. They are less focussed on 'things' (such as new autos and kitchens), and more interested in values and people issues.

And P&G found they responded very strongly to its initiative to reduce deaths from drinking polluted water. A case study in the Financial Times describes the scale of the change in attitude that is underway:

• A year ago, P&G had the highest US sales week in its 173 year history.
• The reason was that 30 million coupons were redeemed in response to P&G's offer to donate "a day of safe drinking water" for every coupon.

P&G's CEO Bob McDonald is no soft touch when it comes to profits. But unsurprisingly, given this boost to sales and revenue, he believes that its Pur activity is "good business, as well as good philanthropy".

This week, Kellogg's, the breakfast cereal company, have followed the same path. They are offering to donate 1 million breakfasts to needy US children. Cleverly, they have realised that BabyBoomers (those born between 1946-70), represent an ideal audience for them. As SVP Doug VandenVelde notes, "it's a generation that grew up eating a lot of cereal."

Incidentally, any blog reader who is on Facebook can also now donate 10 litres of safe drinking water to P&G's Children's Safe Drinking Water programme. Simply click through here, and then click the logo on the new Pur Facebook page. P&G say 550k litres have so far been donated.

The Michelin Guide is the original good food guide.

For over a century, chefs have competed for its coveted 1, 2 and 3 star classification.

But for the first time since 1991's major downturn, the latest edition for France contains not a single new entry at 3 star level, .

Instead, and for the first time ever, the guide now features more budget restaurants than those with stars. 601 won the 'bib gourmand' title for good food at reasonable prices. Only 577 won stars.

This is yet another indicator of the changing priorities amongst European consumers.

Coincidentally, the blog was already planning a visit to Paris over Easter. It is now looking forward even more to the trip.

Stock markets around the world are at an important crossroads.

The blog's regular 6 monthly review compares today's market levels with their 2007/8 pre-Crisis peaks. And as can be seen, none have yet hit a new high. This is quite surprising, given the scale of the G20 and central bank stimulus/liquidity packages over the past 2 years:

• Brazil (lilac column) has been the best performer, down just 9%
• India (light brown): UK (brown): Germany (green) are down 13%
• The USA (dark blue) is down 17%, and Russia (light blue) is down 22%
• Japan (purple) is down 43%, and China (blue-green) down 51%

Interestingly, however, the yield on the world's benchmark long bond, the US 30 year bond (light green), is down 8%. It is therefore the only market where prices have risen (bond prices rise when interest rates fall). This may provide support for the blog's argument on the long-term attractions of G7 interest rates, as published in the Financial Times last year.

The question, of course, as noted in the 'Budgeting for Uncertainty' White Paper, is 'What happens next?' Governments have spent $12 trillion on supporting financial markets since their low-point just 2 years ago. Now we will start to find out whether all this cash has really helped to created a sustainable recovery in the real world outside financial markets.

The US economy is worth $15trn, 24% of the global economy.

Domestic consumption, accounts for 70% of the US total. This means the US consumer represents 17% of the global economy.

China's economy, although the 2nd largest in the world, is just $5.7trn. And its domestic consumption is much smaller, representing only 3% of the global economy.

So changes in US domestic consumption trends really matter to the global chemical industry.

And as the chart from the Wall Street Journal shows, US consumers are no longer so keen to finance their consumption by increasing their debt levels. In fact, total US household debt fell for the second year running in 2010, and is now back to 2004 levels.

Of course, some argue that this means US consumption may now rebound again. But demographics would suggest otherwise:

• US births rose an astonishing 45% during the 1946 - 70 period, compared to the 1921-45 average
• The oldest of these BabyBoomers is now 65 years old, and the median is 53 years old
• Demographers tell us that people in the 55+ age bracket tend to save more and spend less
• And, of course, increasing life expectancy means older people need to save even more

This is quite a different scenario to that which powered demand patterns over the past 20 years. The majority of the BabyBoomers were then in the 25 - 54 age group. This is when people tend to spend more as they marry, settle down, and have children.

Thus the blog continues to believe we are entering a New Normal, where the world can no longer expect the US to act as "the consumer of last resort". In turn, chemical companies need to consider making major changes to their business and innovation models.

Prof Michael Porter's Shared Value concept seems increasingly key to understanding how the next wave of global growth will be created.

The blog is a great believer is learning from the secrets of the world's most successful chemical companies. Thus it was fascinated to read a report by ICIS's Stephen Burns of a major speech by ExxonMobil (EM) president Stephen Pryor.

Pryor warned that "capturing the benefits of downstream integration requires more than simply co-locating petrochemical and refining operations". And he outlined 5 key areas for success, arguing that integration models need instead to focus on:

• Extracting value from every molecule
• Developing the flexibility to select the feedstock that delivers the highest returns for the entire integrated complex, and being able to adjust processes and the product mix in real-time to sustain the optimal recipe.
• Maximising cost savings through economies of scale
• Making the best use of investment capital through joint planning and shared engineering, construction, and infrastructure
• Giving staff a wider perspective by rotating managers between refining and chemicals

Pryor added that EM "is still seeking - and finding - new opportunities to more closely integrate refining and chemicals".

He regards this constant search for improvement as the key factor behind EM's achievement of an average 20% ROCE (return on capital employed) for refining and chemicals over the past decade.

China's housing market seems to be facing the threat of a major downturn. That is the only conclusion to be drawn from the rising sense of concern being expressed by policymakers and the official media.

Last year, China's Academy of Social Sciences estimated that "there are 64.5 million empty apartments and houses in China's urban areas". The figure came from a study of electricity usage, and suggested there has been a large element of speculation behind the recent run-up in prices.

Now, this has been confirmed by Qi Ji, Vice Minister of Housing, who has warned that "China's rising property market in the past few years was driven in part by 'unreasonable' demand from speculators.

Similarly, Premier Wen Jiabao has said "China will 'resolutely' press ahead with controls on the property market to curb speculation". He added that the government will "'severely punish' irregularities in the real-estate market, implement differentiated credit and tax policies, and hold local officials accountable for maintaining stable home prices".

This has led ratings agency, Fitch, to warn that China now faces a "60% risk of a banking crisis by mid-2013 in the aftermath of record lending and surging property prices".

Fitch also seems to share the blog's long-expressed concern that Chinese banks "fuelled record property-price gains by extending a record 17.5 trillion yuan ($2.7 trillion) of loans over 2009 and 2010 under the stimulus program that propelled the nation through the financial crisis".

China's housing bubble has been a main driver for chemical and polymer demand, as was the US housing bubble from 2003-7. The blog therefore continues to worry that the government's need to deflate the bubble could lead to a similar end result.

The blog is still shocked by the terrible events in Japan. It would like to express its deepest sympathy to all those who have suffered loss.

For those of us far away from the disaster, life has to go on. It will be some time before its full impact becomes clear. But in a crisis such as this, there is no substitute for reliable and accurate trade data, to help assess possible market Scenarios.

The above chart, prepared by my IeC colleague Bob Townsend, sets out Japan's major export volumes in 2010, and their destinations. It is based on data from Global Trade Information Services, whose full database covers a vast range of chemical and polymer products:

• Paraxylene (PX) is the largest export. 2.4 million tonnes were exported in 2010, with 1 million tonnes to China (blue column), 550KT to Korea (brown), 300KT to Taiwan (green), and 500KT elsewhere (purple).
• Styrene monomer (SM) exports were 1.4 MT, with half to China, 475KT to Korea and 120KT to Taiwan.
• Polyethylene (PE) exports were 480KT, again with half to China, and the rest to a range of countries.
• Ethylene (C2) exports were 460KT, with nearly half to China, 150KT to Korea, and 95KT to Taiwan.
• PTA exports were 330KT, all to China.
• Polypropylene (PP) exports were 300KT, with half to China, and the rest to a range of countries.

Clearly it is very hard to be clear, at this early stage, about the likely impact of the earthquake. My blogging colleague, John Richardson, has written two excellent posts setting out key background to Japan's chemical markets. Hopefully, these will also prove helpful.

Japan's prime minister has described the current situation as "the country's worst tragedy since World War 2", whilst the emperor has said he is "deeply worried".

Certainly, never in our working lives have we faced the combination of an earthquake, a tsunami and a potential nuclear meltdown - all taking place in the world's 3rd largest economy.

We cannot, therefore, expect to know what will happen next, or how things will resolve themselves over time. Equally, we cannot yet be clear on the potential second-order effects that will occur, even though these could also have enormous impact on the chemical industry.

Today, the blog therefore simply wants to try and record, as objectively as possible, some key facts as we know them. It will also suggest some possible Scenarios that companies might use to help navigate through these difficult times.

The map above, from the Wall Street Journal, is also a good summary of key areas.

Equally, ICIS news and the Insight team are doing a superb job of trying to keep up with developments. Whilst my blogging colleague John Richardson is also highlighting key developments as they happen.

Energy markets
• We are already seeing major impact in this crucial area. 5 refineries (capacity 1.2mbd), and 11 nuclear plants, are currently offline in Japan. We have no idea when they may return. And, of course, the Fukushima Daiichi Nuclear Power Station remains in a state of emergency.
• This loss of power will not be restored quickly. Already the Tokyo electric company has begun "rolling blackouts" to conserve energy, and it expects these to continue until at least the end of April. This will impact all forms of manufacturing, as well as individuals.
• Japan's loss of capacity means its imports of LNG (liquefied natural gas) and distillate are already beginning to increase. This pushed up European LNG prices by 7% on Monday. Equally, it means refineries elsewhere will focus on distillate production. For petrochemicals, this could mean naphtha will become cheaper, as global gasoline demand will likely remain weak.

End-user markets
Autos: All Japan's auto factories are currently shutdown. This is the first time this has ever happened. Some, such as Toyota's, are now expecting to restart. But nobody can know whether vital components will be available, given the complexity of the various supply chains.
There may well be second-order impact in other regions, because of the supply chain issues. Toyota, for example, has already slowed production in the USA. In Europe, BMW is worried about supplies of electronic displays and navigation systems.
Housing/construction: There could well be a boom in construction, once the current crisis is over. Large numbers of houses and other buildings have been destroyed. But this will also depend on the wider state of the economy. If this weakens further, then major cities might see lower demand for office space, stores and hotel rooms.

Petrochemical/polymer markets Japan is a key supplier of products such as paraxylene and styrene, as discussed on Monday. It may not be easy to immediately replace these exports.
Equally, China relies on Japan for 13% of its imports, whilst Japan is a key supplier of advanced components to Asian nations that specialize in the final assembly phase of manufacturing.
Again, therefore, the key issue is potential supply chain disruption, where the lack of one, perhaps small, component, might stop production on a temporary basis till replacement sources can be found.

Financial markets.
Investors have grown used to central banks 'rescuing' us from crises in the past. But events such as the Asian and Russian Crises in the late 1990's, or the current Western financial crisis, are not the same as the widespread loss of life and the destruction of property and factories. The Bank of Japan can provide liquidity to help companies pay their bills. But it cannot wave a magic wand and rebuild what has been lost.
Equally, the cost of reconstruction, perhaps $200bn, will impact Japan's historical role as a supplier of capital to other Regions. It is one of the largest holders of US Treasury bonds, but probably it will need to sell some of these to finance reconstruction. Equally, it had promised to fund 20% of the proposed European bailout fund - but can it still afford to do this?

Plus, of course, we should not forget that this is not the only crisis that we currently face. Major problems continue in the Middle East and N Africa. Saudi troops had to go into Bahrain earlier this week to try and restore order. Whilst it also seems that the blog's fears of potential civil war in Libya may be coming true. Inevitably, however, the crisis in Japan means the world has less attention span and capacity to deal with these.

How should companies respond?Somehow, we have to find a middle way between panic and complacency. One way of perhaps achieving this might be to think in terms of different timescales:

• Short-term recovery. Let us hope that the nuclear issues will be resolved quickly, and that Japan might be on a path towards recovery and reconstruction within a few weeks. Equally, that other second-order impacts are relatively minor.
• Medium-term rebuilding. Perhaps this will not all happen within a few weeks, but may take some months to set in motion. Clearly, the risks of disruption will therefore be higher, plus the potential impact on markets elsewhere.
• Long-term damage. Suppose our worst fears are realised, and a nuclear meltdown does occur? Hopefully, this is a very minor probability. But if it were to occur, it would become such a major priority, that moves towards recovery and reconstruction could be significantly delayed.

Every company will have its own version of these potential Scenarios. Sharing these views internally, and externally with key partners in the value chain, might be very valuable, as something seemingly obvious to one business area or company might be a total surprise to another.

The above are the blog's own thoughts on some of the key issues, as they appear today. The facts reported come from sources known to be usually accurate, but of course nothing can really be guaranteed in today's circumstances. It hopes readers might find them helpful, and will try to update them as the situation develops.

It is nearly a week since the Japanese earthquake/tsunami which led to the nuclear emergency at the Fukushima Daiichi complex. Yet information on the actual nature of the problems has been very difficult to obtain.

In case readers have experienced the same issue, the blog is reprinting in full the article below from today's Wall Street Journal. This seems to be based on the most comprehensive information available from Japanese and US sources.

EU auto sales remained weak in February, and dependent on just 4 countries. As the chart shows (red line), they followed January in being at the bottom of historical monthly sales. Overall, January and February were down 0.3% versus 2010, with 2 million autos sold:

• German sales were up 16% at 435K; France was up 11% at 390k, The Netherlands was up 24% at 124K, and Belgium up 10% at 106K.
• These 4 countries were 52% of total EU sales, up from 46% in 2010.
• The other 3 of the 'Big 5' markets continued to see major downturns - Italy down 21% at 325K; UK 10% at 192K; Spain 26% at 120K.

Equally worrying for chemical and polymer companies are the signs that the Japanese disaster is likely to lead to weeks, if not months, of supply chain disruption. Many auto and component factories there remain shutdown, and power outages look set to continue into April.

This will have some bright spots eg Toyota Prius prices are rising in the USA, as supplies ex-Japan run low. But GM has announced a complete ban on "non-essential spending" - the usual first sign of a major problem. It had already announced shift-cuts at 3 factories in the EU/USA, whilst Renault has cut production in S Korea, and Volvo has warned of potential major disruption.

The issue is that today's auto supply chains often depend on high-value electronic components, manufactured in Japan. Without these, the cars themselves cannot be assembled, even if all the other parts are still available.

100 million children in developing countries can't to see the blackboard in school, because of poor eyesight.

They need self-adjusting glasses, because of the shortage of optometrists.

So the blog was delighted to learn about Dow Corning's work with the Centre for Vision in the Developing World to overcome this problem.

Their new Child ViSion™ initiative uses silicon technology to develop "glasses which are able to withstand daily use". Its aim is to design glasses that look attractive, whilst also reducing production costs to make them more affordable.

Already, 40,000 children in 20 countries have been helped by Child ViSion™. It is another example of the power of the Shared Value concept launched by Prof Michael Porter earlier this year.

Something very strange has been happening to US energy prices over the past 2 years. The chart above shows the ratio between WTI crude oil pricing and natural gas:

• It was between 6.0 and 13.0 for 22 years between 1986-2008, with some minor exceptions, and averaged 9.9.
• Yet since January 2009, it has been between 9.0 - 25.0, and averaged 18.3.

WTI has ~6 times the energy content of natural gas. So its floor at 6.0 makes good sense. Equally, there were periods of supply disruption between 1986-2008, such as Gulf War 1 in 1990.

But there is no logic behind the dramatic increase in the ratio since 2009. Crude oil inventories have never been higher, in either the USA or globally. And there is plenty of spare capacity, if supplies were to go tight.

The real reason is the easy money policies of the central banks, particularly the US Federal Reserve. These have combined with the development of super-fast computers, which now dominate much financial market trading.

As Bloomberg note in an excellent article, "as shares have been traded more furiously, the stock market has become more volatile, more disruptive and less useful". The blog's friends in energy markets see the same trend of increased volatility - last Friday, naphtha prices traded in a $25/t range!

In the short-term, Libyan oil seems likely to be removed from world markets by the current UN action. But Saudi is already pumping 8.9mbd, according to latest reports. And OPEC quotas have effectively been abandoned.

But as long as the US Fed provides the cash, the super-computers will party on:

• Today's high prices are causing demand destruction down the value chain.
• Yet chemical companies have to buy forward, as long as feedstock prices are rising.

The risk, of course, is that one day, the Fed may turn off the liquidity tap and stop the super-computers' party. Then we could easily suffer another period of major destocking, similar to that of H2 2008.

The blog has worried for some time about the growing dominance of super-computers in financial markets. Their activities are based on arbitrage between markets, not on fundamental analysis. And their power means that no financial market now knows what it is actually pricing.

The headlines above, from today's Bloomberg Energy page, highlight the issue. Even Bloomberg's experienced editors and reporters are now totally confused by what the markets are doing. Thus they report that:

• Oil prices retreated 0.6% on worries of lower Japanese consumption
• Oil prices increased 1.6% on hopes of higher Japanese consumption

All that has really happened is that the super-computers had spotted a brief opportunity to make money by forcing prices down for a nano-second or two, after forcing them up previously.

This is a very dangerous situation for anyone, like the chemical industry, who depends on markets for price discovery.

UPDATE: This afternoon, a leading US Fed Governor, Richard Fisher, said he thought the Fed's actions had produced "extraordinary speculative activity", and added that "there is an enormous amount of liquidity sloshing around the US economy." Its just a pity he only recognises this now, after the damage has been done.

The blog has built great loyalty amongst its readers. 24% visit it twice a week.

Recently, as during the 2008 financial Crisis, it has gained many new readers. They also want to better understand developments in the Middle East/N Africa (MENA), Japan, China, and oil markets, and what these might mean for future chemical demand.

The blog continues to believe that the key feature of today's world is "uncertainty". New readers might therefore like to read the blog's New Year Outlook, Planning for Uncertainty, and its recent White Paper 'Budgeting for Uncertainty' (click here for free download).

Recent key postings also include:

• The Potential Impact of the Japan Disaster, plus key exports
• Oil prices - the Libya factor, plus analysis of key exports
• Young populations lead social unrest in MENA
• Housing markets remain uncertain (plus US, UK, China markets)
• US auto companies lack pricing power, plus EU auto sales
• Super-computers party in financial markets, and speculation
• China's "60% risk of a banking crisis by 2013"
• ExxonMobil sees Integration as key strength

The blog's New Normal concept highlights the major demographic changes underway. It believes these will create new global demand patterns, and new growth opportunities, for those who recognise them:

• New Normal Seminar conclusions, plus P&G's and Dow Corning's successes with Shared Value
• Prof Michael Porter's Shared Value concept, as a driver for the next wave of global growth

Changes in US housing values continue to exert a larger and more important impact upon household consumption than do changes in stock market values". That's the conclusion of an important new study by the developers of the main S&P Case-Shiller US House price index.

The chart above, based on US Census Bureau data, shows the current state of play in this critical area. It highlights that starts are still well below anything seen since 1959, when records began. In February, they were down 21% versus 2010, at 479k.

This suggests, to the blog at least, that a new paradigm is developing.

We should no longer automatically assume that US housing, a $35bn contributor to chemical sales at its peak, will quickly recover to earlier levels.The new research by Profs Case, Shiller and Quigley, supports this view. In pioneering work, they analyse the 'wealth effect' produced in the USA when the housing market was rising. It suggests:

• Between 1980-2005, "the value of US housing stock increased $19trn".
• Between 2001-5, at the tail-end of this Boom, US homeowners extracted $3.5trn of this value to support their personal spending.
• Much of this money went directly into areas that boosted chemical demand, as people bought new kitchens and bathrooms, and new autos.

But now, it appears that this great engine of growth has reversed.

US housing wealth is already down 30% since 2005, as prices have fallen. And the outlook is for further decline. The blog will continue to watch this critical sector with great attention.

Update: Today's S&P/Case-Shiller house price index for January showed a further fall, taking prices very close to their April 2009 lows. S&P warned that "the feared double-dip recession may be materializing".

The blog's recent Asian visit revealed considerable anxiety about the state of demand in China. As its blogging colleague, John Richardson, has also described, the country's lending cutbacks may finally be taking effect.

New official figures for lending and electricity consumption support this view. These are two of the only 3 figures trusted by likely future premier Li Keqiang. He described GDP numbers as being for "guidance" only.

And as the chart shows, both lending (red column) and electricity consumption (blue line) were down in February. Of course, part of this was due to Lunar New Year. But even so, total lending in Jan/Feb was down 24% versus 2010, a quite remarkable fall. Electricity growth also seemed to slow, up 'only' 11% compared to 2010's 28% rise.

Last week, further signs appeared that a 'pause' may now be underway:

• ICIS's Linda Naylor, one of the most trusted observers on the polymers scene, reported offers of Chinese polyethylene (PE) into Europe at €100/t ($143/t) below current prices.
• Earlier, ICIS's Fanny Zhang in Shanghai had reported ethylene sales underway from the Fujian JV, due to "high inventories".

Polyethylene is THE leading indicator for chemical demand in China. Not only is it the world's major polymer. But it has also been the focus of the massive speculation on China's Dalian futures exchange.

Equally, China's supply/demand balances mean that in normal times, it should always be an importer of both ethylene and polyethylene. In 2010, it was the world's largest PE importer at 4.9 million tonnes, according to Global Trade Information Services data.

It is probably still too early to be sure that today's 'pause' will continue. But if the blog was still running a major business, it would certainly be updating its ideas on how to mitigate a Downside Scenario, just in case.

Sadly, the blog needs to update its March 16 post, which analysed the potential impact of the Japan disaster.

Earlier hopes of a quick end to the problems have proved false:

• 250000 people are now in refugee accommodation
• The death toll is still rising, and is likely to reach at least 18000
• The head of the International Atomic Energy Agency says we are "still far from the end of the accident" at the Fukushima Daiichi nuclear plant.

Some in financial markets seem to regard current events as a 'buying opportunity'. But the blog disagrees:

• Japan is the world's 3rd largest economy, and its electronics industry powers much of the equipment we now take for granted in our personal and working lives
• Container shipping companies including Hapag-Lloyd and OOCL have stopped calling at Tokyo and Yokohama
• Radiation was found on a Mitsui OSK ship that had been 80 miles (128km) from the problem area
• Europe's auto suppliers association fears "the return to normal production levels may take months, and cost €bns of lost revenue"
• Bosch, the world's largest component company, says "it can't predict whether it will be able to secure component supplies beyond the end of this week".

As the Wall Street Journal map above shows, the US has now set a much wider evacuation zone (red dots) than the Japanese government (black dots). The US Navy was told Friday to stay 100 nautical miles away from the Fukushima plant, and yesterday the US embassy began handing out potassium iodide tablets in Tokyo.

And, of course, the problem of rolling electricity cutbacks across Japan continues. People have cut down heating, and train services have been cancelled, to try and conserve power. But damaged refineries and wrecked power stations cannot be replaced quickly. Whilst European and Asian diesel fuel prices have jumped 20% as a result of the crisis.

In terms of the Scenarios outlined on March 16, it now seems unlikely that we are going to see a Short-term Recovery Scenario. This has potentially very serious implications for industry:

• Many companies operate within extended global supply chains. It is therefore not easy to determine what components might be impacted. China, for example, is often the final assembler of goods for the West, but Japan is the key supplier in terms of the critical components.
• Some companies, such as Hewlett Packard and GM, have been well aware of the risks since the disaster began. But many may have been lulled into complacency by official statements.
• Japan pioneered the Just-In-Time approach to manufacturing. No shortages of critical components have yet been reported, but they may well now start to occur, as current inventories are exhausted.

Companies therefore need to quickly establish high-level Action Teams, reporting to senior management. Their remit should be to understand the implications of a move into either the Medium-term Rebuilding or (hopefully never to be needed) the Long-term Damage Scenarios.

We can, of course, all hope that a quick solution to current problems may be found. But in today's increasingly uncertain world, Boards will know that hope is not a strategy, or a sensible contingency plan.

The Financial Times reports two interesting facts:

• Japan's leading seismologist warned Tokyo Electric Power in June 2009 that "tsunamis of a completely different scale have come before" in the region of the Fukushima Daiichi nuclear plant. One, in 869, had "destroyed a castle". But no changes were made to the plant's defences.
• The US has now spent ~$5trn on stimulus programmes and the Federal Reserve's two 'quantitative easing' programmes. Yet the "economy has grown just 4%, $600bn, versus its trough in mid-2009". This means it "got about 12c in growth for every dollar" spent. And the $5trn still needs to be repaid out of future growth.

Last November, the Chairman of the US Federal Reserve justified his $600bn QE2 programme to boost financial markets by claiming "higher stock prices will boost consumer wealth and help increase confidence", whilst also leading to "lower mortgage rates".

And stock prices have indeed risen. As the above chart from PetroMatrix shows, there has been an 86% correlation between the QE2 $600bn POMO purchases (Permanent Open Markets Operations, green column), and the S&P 500 stock index (blue line). Investors have also increased Margin Debt which, at $350bn, is now back to pre-financial Crisis levels.

But whilst the Fed's money has boosted financial markets, consumers are losing confidence. The key Univ of Michigan index fell a near-record 10% last month. Consumers are not stupid, and know they will have to pay the bill for the Fed's actions via higher taxes and spending cuts:

• In addition, of course, they are being hit hard by the rise in oil and gasoline prices. These have risen via the 'correlation trade', as traders use the Fed's low-cost money to speculate in commodity markets.
• Plus, by openly encouraging this move into risky assets, the Fed has actually caused interest and mortgage rates to rise.

Now we have to wait to see what happens next. Most investors are hoping for a 3rd round of liquidity to be unleashed, once QE2 ends in Q2. But some Fed Governors are now publically questioning its rationale.

The problem is that the damage has already been done. QE3 would lead to higher oil prices, and further depress consumer confidence.

But doing nothing would be equally painful. If oil prices returned to more realistic levels, for example, demand would suffer in the short-term as the Value Chain destocked, plus companies would face major losses on working capital.